Crowdfunding for Entrepreneurship

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Special Report by Shareq Husain, Anton Root November 2015

1 Executive Summary

rowdfunding is no longer just a niche form of financing Cfor creative projects. In 2015, transactions across WHAT’S INSIDE WHAT donations, lending, reward, and equity crowdfunding is ALLIEDCROWDS expected to cross $34 billion, and overtake the VC industry DOES Executive Summary ...... 2 in size. The genie is well and truly out of the bottle. Foreword ...... 3 AlliedCrowds is a UK-based startup focused on spreading prosperity through crowdfunding, founded by Acknowledgements ...... 4 noted author and former hedge fund manager Lars Kroijer. Crowdfunding Overview ...... 5 We are pleased to partner with Global Entrepreneurship Network to produce the definitive crowdfunding guide for Traditional Funding Methods ...... 6 entrepreneurs during Global Entrepreneurship Week 2015. Funding Circle on P2P Lending ...... 7 The report starts out with an overview from Jonathan Ortmans, President of the Global Entrepreneurship Crowdfunding and Traditional DATA AND ANALYTICS: Network. Jonathan emphasizes how we have only Financing Methods ...... 8 We use proprietary methods just begun to scratch the surface on the impact that Kiva’s Social Crowdfunding Mission.....9 to provide accurate insight crowdfunding can have. The report defines the different on crowdfunding in the models of crowdfunding, provides an overview of the Picking the Right Model...... 10 developing world. global landscape, and explains where crowdfunding fits Indiegogo Looks to the Future...... 11 compared to the traditional models of finance. To give an overview of P2P lending, we spoke with Sam Hodges, Crowdfunding Successfully...... 12 cofounder of Funding Circle, who highlights the intrinsic Featured Campaign: advantages that marketplace lending has over balance sheet lenders. The report then looks at how crowdfunding Coolest Cooler...... 13 platforms have disrupted traditional financiers. After the Campaign Ends...... 14 “Working together and enabling cross fertilization of ideas and resources, the finance industry can evolve to Crowdfunding, Entrepreneurship ADVISORY: serve the changing needs of entrepreneurs, and spur a new and Development...... 15 We leverage our extensive leap in global economic prosperity,” said Shareq Husain, Financing Entrepreneurs industry knowledge to guide head of strategy and innovation at AlliedCrowds. those interested In the next section, we spoke with Kiva CEO Martin in the MENA Region...... 16 in crowdfunding. Tschopp. It was exciting to learn that Kiva has developed a new model of social underwriting that is not dependent on the FICO score, and has the potential to deepen financial inclusion globally. The report then focuses on choosing the Written by: right crowdfunding model, both from an entrepreneur and Anton Root, Global Crowdfunding Associate investor perspective. Edited by: The report shares insights on how to optimize campaign Shareq Husain, Head of Strategy and Innovation TECHNOLOGY SOLUTIONS: strategy, a case study of one highly successful campaign, We work with global and manufacturing tips from the CEO of a firm servicing organizations to develop crowdfunding entrepreneurs. It then explores the link crowdfunding platforms between crowdfunding and sustainable development, and provide other related which is a $95 billion opportunity in the developing world services. alone by 2025. The report ends with a feature on financing entrepreneurs in the MENA region with insight from the MAGNiTT founder Philip Bahoshy. We hope the report will be useful in showing the increasing sophistication of the global crowdfunding industry, and in helping entrepreneurs to think about how they can turn to the crowd to finance their businesses and products.

2 Foreword

ver the past five years, there has been an explosion of interest among Opolicymakers around the world in creating ecosystems that help entrepreneurs start and scale new firms. One obvious approach is to make sure that there is enough early stage capital available — and that is where the global trend toward crowdfunding is really starting to make an impact. According to research, crowdfunding platforms raised $16.2 billion in 2014 — more than tripling the amount from the previous year. The figure is even more impressive considering the amount of regulatory uncertainty that has existed on this issue around the world. But while startup-focused policymaking is a new concept for even the most entrepreneurial economies, government decision makers are beginning to make progress as more and more countries choose to bring this form of early stage financing to the regulated world. In Asia, Korea’s National Assembly passed legislation in July 2015 making fundraising from local individual investors a legal activity — part of a package of 61 economic stimulus bills proposed by President Park Geun-hye. In Europe, it appears nations like the United Kingdom and Sweden have already gone through more than one round of regulatory actions to fine- tune rules for crowdfunding. Australians too are calling for lowering the threshold for ‘sophisticated’ investors who are allowed to participate in equity crowdfunding. “We have only begun to And in the United States, the US Securities and Exchange Commission recently finalized the rules scratch the surface on the guiding how startups can sell equity and the new guidelines become active in April or May 2016. impact that crowdfunding With the regulatory frameworks relaxing around the world, we have only begun to scratch the surface can have.” on the impact that crowdfunding can have. Over the next several years, you can expect the number - Jonathan Ortmans, President, Global of crowdfunding platforms to increase. You can also Entrepreneurship Network expect the amount of capital invested to increase. And don’t be surprised when you also see exciting new high-growth startups emerge, bringing innovations to society while driving global economic growth. - Jonathan Ortmans, President, Global Entrepreneurship Network

3 Acknowledgements

We would like to thank the following people, who helped to make this report possible:

Jonathan Ortmans, President, Global Entrepreneurship Network Mark Marich, Executive VP, Global Entrepreneurship Network Alana Ramo, Director of Strategic Partnerships, Global Entrepreneurship Network Susan Towers, Marketing Director, Coolest Rose Spinelli, Founder, The CrowdFundamentals Beth Macdonald, VP Business Development, Dragon Innovation Scott Miller, Founder and CEO, Dragon Innovation Sam Hodges, Cofounder and US Managing Director, Funding Circle Alisa Cordesius, Social Innovation and Design Manager, Indiegogo Elena Ginebreda-Frendel, PR and Events Associate, Indiegogo Jason Riggs, Communications Director, Kiva Martin Tschopp, CEO, Kiva Philip Bahoshy, Founder and CEO, MAGNiTT

4 Crowdfunding Overview

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rowdfunding is a novel way for project organizers, entrepreneurs, crowdfunding model) to post their campaigns, and allowing the Cand startups to raise money for their causes. Facilitated audience to browse through them, or to search for those matching by the spread of online technologies (and specifically, social specific categories, locations, etc. media), crowdfunding capitalizes on the many-to-many form of Crowdfunding has grown rapidly over the last several years, communication that has already opened up new opportunities in morphing from a way for amateurs to fund hobby projects, to a industries from ecommerce (e.g., Ebay) to accommodation and travel multibillion dollar market globally, embraced by both medium-sized (e.g., Airbnb, Uber). and large firms, as well as some of the largest multilateral institutions Crowdfunding did not arise within a vacuum, but was instead a around the globe. response to the needs of individuals who were unable to access funding to grow their businesses in the aftermath of the 2008 recession. Making use of new, internet-enabled communications tools, crowdfunding Crowdfunding Market Size created an alternative method for entrepreneurs to start up and grow their businesses. At the same time, historically low interest rates have $35b pushed investors to seek returns in alternative investments. There are four models of crowdfunding: donations-, rewards-, $30b lending-, and equity-based. Donations-based crowdfunding allows individuals to send money to people or projects in need, with no expectations of a tangible perk $25b in exchange for their money. Rewards-based crowdfunding channels money to creatives or $20b entrepreneurs, who promise to send a reward in exchange for the money; often, this model is used to collect pre-orders for an innovative product. $15b Lending-based crowdfunding (also known as debt-based crowdfunding or peer to peer lending) allows individuals to lend $10b money to other individuals, or to companies, in return for regular (and agreed-upon) interest payments. $5b Equity-based crowdfunding allows individuals to purchase equity in a company, with the possibility of that company making an exit (typically, and IPO or acquisition), leading to a financial return. $0b 2009 2010 2011 2012 2013 2014 2015 The crowdfunding platforms take on marketplace features — enabling causes, products, projects, or startups (depending on the Source: Massolution

5 Traditional Funding Methods

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rowdfunding is one of several options available to entrepreneurs bank loans. The amount of money startups can borrow depends Cwho are looking to fund their businesses. Below we outline some heavily on the company’s maturity and financial strength. Small, of the options that are typically available to startups through various localized banks have been especially important to fueling early stages of maturity. stage growth for startups, as they are more likely to consider “soft” The earliest entrepreneurs, who have little more than an idea qualities of a startup such as the strength of the business plan and for a company, typically start out by bootstrapping their startups. the management team, instead of emphasizing a firm’s revenues. The initial phases of a company are often funded through personal Instead of taking out loans from a bank, some startups can savings, friends or family members, or by maxing out credit cards finance their operations by turning to angel investors or VCs, who — an unappealing option as credit cards often carry high interest invest in a firm in exchange for equity. The investment amounts rates. vary largely, from tens of thousands of dollars for seed-stage firms, If a startup proves viable in the early going, its founders have to millions for later financing rounds. Early investors can bring with typically turned to banks in order to finance further growth. Indeed, them non-financial benefits, expanding an entrepreneur’s network roughly 40 percent of startup capital in the US has come from bank and providing mentoring experience. loans. In the European Union, 30 percent of startups have secured

Startup Funding Lifecycle

Crowdfund Investing <$1m Mainstream Financing >$1m

Crowdfunding <$50k

Capital Needs Capital Institutional Capital Funding Gap Funding

Idea/Inception PoC/Prototype Startup Early Growth Expansion Source: InfoDev/World Bank

6 Funding Circle on P2P Lending

unding Circle was born out of frustration with the traditional AC: Who are the lenders on Funding Circle? Fsmall business loan process. As a small business owner himself, SH: It is different from country to country, and driven largely by Funding Circle’s US managing director and cofounder Sam Hodges regulatory differences. In the US, there are three different ways of and his business partner experienced first-hand how hard it is for forming capital. The first is the institutional whole loans marketplace, small businesses to access finance. When the pair couldn’t get a where institutional investors, large money and asset managers, credit small business loan to grow their chain of succeeding fitness centers, hedge funds, and others who are lending through us or buying loans they knew something was wrong. So, they set out to build a better through us, are building up substantial portfolios. The second way is solution for American small business owners. In October 2013, they through our fractional marketplace. In the fractional marketplace, we merged their marketplace lending business with Funding Circle. put loans into securities and sell them in a private securities offering. In Since then, Funding Circle has lent more than $1.5 billion to more that way, we are attracting accredited investors, and there are around than 12,000 businesses across 15,000 loans. There have been over 9 million accredited investors in the US. We hope to have an offering 43,000 investors including individuals, institutions and even the for retail investors one day. Third, we have a set of managed funds UK government. With the recent acquisition of Zencap, the lender that basically buy an index of our market. For family offices and high now operates in five countries: US, UK, Germany, Spain, and the net worth individuals looking to build a diversified pool of loans, it is Netherlands. We spoke with Hodges to better understand the P2P a very straightforward and proper way of doing it. At scale, there are model, and how Funding Circle is changing the lending landscape. meaningful advantages, as the best platforms attract the most capital at the lowest cost, because frankly, there is a lot more trust, and that is ALLIEDCROWDS: What competitive advantage do P2P/marketplace how investors think about things. lenders have over traditional banks? SAM HODGES: Markets have distinct advantages relative to balance AC: When should entrepreneurs approach Funding Circle? sheet lenders. As a market place, you can bring in a wide range of SH: We focus on providing credit for established expanding business. different types of capital to serve a wide range of different borrower There is a pretty broad range; it could be a business with $250,000- needs. Because of the ability to serve a wide range of borrower needs 300,000 of revenue or a business with $3-4 million in revenue. The and at different interest rates, that gives a distinct advantage in serving key for businesses is to not take on too much debt. The first thing is a wide breadth of borrowers and strategically, that is important as you to really understand your own capacities and what levels of debt can can convert a higher percentage of borrowers who come to you into you support. What is the money going to be used for, and is it going customers. This results in lower loaded acquisition costs compared to to generative a positive economic return. We are looking to focus on lenders who have a narrower product range, who will inherently have business that are expanding with strong cash flow characteristics and lower conversion rates. helping them invest in projects that will help them grow. The second major advantage of a marketplace model is its scalability. Balance sheet lenders have constraints on long term return on equity. AC: What kind of impact does this have on job creation? As a marketplace business, we are much more scalable. Investors are SH: We have done a number of detailed surveys on this. For buying loans through us, we have a wide diversity of loans, and as a borrowers, after six or seven months, typically revenues and network, we actually don’t have to hold regulatory capital against the profitability of business have gone up, and have added between one loans we are doing, as investors are buying the credit, taking the yield, and three additional people. There are cases of firms having added 10- and also taking the credit losses. 30 jobs, because they are able to accelerate their business so much. We Finally, because we are not using deposits and maturity are excited about the downstream impact we are able to create, and transformation that levered deposit lending implies, there is, on some that we’re able to help great businesses expand. What that means are levels, less systemic risk from this model of credit formation than the additional onramps from wealth creation, the ability to address income historical manner. inequality, and of course, the job creation angle.

AC: Is the growth of the P2P industry sustainable, and how do you AC: What was 2015 like for Funding Circle, and how do you feel see banks responding to this growth? about 2016? SH: We see a lot of enthusiasm from banks to partner with Funding SH: 2015 has been an incredibly strong year, the business overall Circle. Most banks don’t view smaller ticket commercial lending as their has grown by over a 100 percent. The US business has grown by over bread and butter. Many view our business as highly complementary 350 percent, year-on-year. Credit performance stays very strong, and to theirs. We now have banks working with us on both sides of the we raised a substantial Series E equity financing with a $150 million market. We have partnerships with Santander and RBS in the UK. round. We’re going into 2016 feeling the wind in our back.

7 Crowdfunding and Traditional Financing Methods

lmost by definition, startups want to grow, yet typically don’t Where Crowdfunding Fits In Ahave the funds necessary to realize their growth. Friends, family members, and maxed out credit cards can only take a company so far; the very lucky few are able to access angel networks and VCs willing to invest. The vast majority of startups (as many as ten million $10m Stock Exchange & in Europe), however, are unable to access the financing they need to Private Equity grow. Crowdfunding is an effective way for entrepreneurs to bridge $1m Venture the gap between the earliest stages of funding and later growth Capital capital. While it is a great fit to fill that gap, it should not be thought of as a full replacement to more traditional channels of funding. In Angel some cases, there is an overlap, but crowdfunding is best used as a Investors & Banks tool to supplement the more traditional financing methods. $100,000 Entrepreneurs in the earliest stages are typically unable to make Crowdfunding use of crowdfunding. Crowds are willing to pre-purchase a product Friends & on a rewards-based crowdfunding platform like Indiegogo, but Family they need to be convinced that the product is viable. Without a Source: European Crowdfunding Network $10,000 product to showcase, even if it’s still in prototype stage, a campaign is unlikely to persuade the crowd to pledge money, unless there is a Idea Launch Growth Consolidation strong altruistic perspective. Therefore, early stage startups still rely primarily on friends and family, as well as credit cards, to finance on running their business. Indeed, one of the advantages of P2P their businesses. If a startup decides to crowdfund later on, friends lending platforms is the speed with which loans are processed and family members can help the entrepreneur in other ways: by — Funding Circle, for example, can process an application within sharing the campaign among their own social circles, for example, hours and disburse the loan in under two weeks. which will help to build momentum. More recently, banks have also made use of P2P platforms, Since the 2008 recession, banks have shied away from lending both by lending money via the marketplaces, and by referring to early stage businesses, limiting a crucial source of startup businesses. That’s a sensible strategy, as banks are typically most funding. Even without the recent credit crunch, bank loans can accustomed to working with larger clients and do not have an be quite cumbersome for time-starved entrepreneurs. Business incentive or the expertise to work with smaller firms. The banks loans typically take months to process; the application itself can do, however, have money to lend, and lending this capital via a also be time-consuming, taking entrepreneurs away from focusing marketplace is an effective solution. Such developments point to a potential future in which established institutional players work with online intermediaries to mutual benefit. Startup Sources of Capital Angels and venture capitalist firms are, likewise, making use of crowdfunding intermediaries, primarily as a way to discover, Personal Savings communicate with, and invest in startups they would not have Bank Loans found otherwise. The best example of this AngelList, which emerged

Credit Card as an online platform for startups to connect with potential backers, and has since introduced the Syndicates feature, which allows Family accredited investors to co-invest alongside prominent Silicon Valley Business Acquaintances investors. That’s a model that can be replicated for specific sectors

Angel Investors and geographies, and greatly expanded as equity crowdfunding opens up to the unaccredited investors following the SEC’s recent Close Friends approval of the JOBS Act. Venture Capitalists While, initially, the talk around crowdfunding centered around how it would challenge existing players, the new funding model Government Grants has emerged as more of a complementary tool. Expect more and Have Not Used Finance more traditional players to turn to crowdfunding processes and 10% 20% 30% 40% 50% 60% 70% 80% technology to open up investment opportunities to the masses. Source: INC. Fast-Growing Firms Sources of Funding, The Kauffman Foundation

8 Kiva’s Social Crowdfunding Mission

Image Source: Kiva

ew organizations have done more for entrepreneurship globally Fthan Kiva. A trailblazer in the crowdfunding and P2P lending The Kiva Zip Model space, the organization celebrated its 10th anniversary last month. In its ten years, Kiva has facilitated 920,000 loans to the tune of $775 million. Of the 1.8 million borrowers on the platform, 625,000 have come from least developed countries; 75 percent of the borrowers have been women. The company operates in 83 countries globally, and 202,000 of the borrowers have come from conflict zones. “This year, we are on track to crowdfund nearly $140 million in microloans,” CEO Martin Tschopp said. “It’s difficult to get an exact Access Kiva’s 1.5 million lenders figure for microfinance lending overall, but estimates vary around $50 to $100 billion globally, so we’re a small part of the total equation.” But that doesn’t mean Kiva is making a small impact. Quite the contrary — because Kiva provides its capital at zero percent interest to via crowdfunding and P2P lending,” Tschopp said. “But many P2P its field partners, it encourages these institutions to “go as deep as they companies are ultimately using the FICO score, combined with can — go to the most rural and poorest areas and provide innovative new technology. What we’re doing is fundamentally different — solutions,” Tschopp said. it’s social underwriting that’s not based on the FICO score. We don’t In addition to providing loans, Kiva encourages its partners to offer care about credit history or the business’s income. There are only two training to their clients on financial literacy, entrepreneurship, and requirements. The entrepreneurs need to bring in the first group of much more. That enables the previously underbanked to not only lenders — the friends and family round. The average requirement is obtain the capital they need to grow their businesses, but to also learn 20 lenders, but we reduce that if the entrepreneur is low-income or about how to best make use of the loans they receive. if the business type is particularly popular on the platform, such as Kiva’s loans are making an impact beyond just the individual small farmers. The second requirement is being able to tap into Kiva’s borrowers. That’s in large part because most of the borrowers are community of lenders and the wisdom of the crowd to get their loans women, who tend to reinvest a large portion of the money they earn fully funded.” into their families. That, in turn, creates stronger communities and Tschopp said this “requires borrowers to hustle and write a leads to greater economic growth for their countries. compelling story,” but if they are successful, they are able to access a To further the impact of their loans, Kiva has started to lend money zero-interest loan to grow their business. If Kiva can continue to grow to SMEs with the explicit goal of creating jobs. In Haiti, for example, this social underwriting initiative, Tschopp said the company would Kiva made a loan a year ago to a social enterprise with the goal of look to expand the program to less developed nations, like Mexico. creating 300 permanent, quality jobs — thus far, the loan financed 100 Kiva has had great success in the last ten years, and its focus on new employees and contracts with 300 smallholder farmers. providing new and innovative methods of financing entrepreneurship “Over the years, we’ve facilitated 100 such SME loans, and the mean the company is well-positioned to expand its reach in the next demand from lenders has been huge,” Tschopp said. “The question is, decade. The fact that new players have since jumped into the field, how large can this scale, can we do 100 or 1000 of these loans every Tschopp thinks, can only help the fledgling industry. year?” “I’m extremely bullish,” he said. “In the developing world, 2.5 billion Though Kiva is arguably best known for its work in developing people are underbanked, and we are one piece of the puzzle in financial nations, one of its most innovative solutions has come from the US, inclusion. But the need is great, and with so many financial inclusion where it’s piloted a ‘social underwriting’ program via Kiva Zip. startups working on this, I can’t see the industry going anywhere but “There is a lot of talk about new ways of underwriting credit up.”

9 Picking the Right Model

ntrepreneurs in different stages of development have different however, unless a startup can show that it’s on the path to fulfilling its Echoices to make regarding the type of crowdfunding campaign vision. Like for rewards-based crowdfunding, entrepreneurs must be they wish to run. comfortable with opening up their businesses to scrutiny, which is even Before outlining what businesses best fit the four types of models, greater for equity campaigns, as investors will want to see business however, it is important to mention that crowdfunding is not plans and cash flows to date, along with other sensitive information. appropriate for every company. Lending: P2P lending is a great option for later-stage startups. Crowdfunding campaigns, by their nature, invite scrutiny and Because lenders will expect a return on their investment, a startup encourage transparency — a company that is awaiting patent must be confident that its cash flows will be able to cover monthly approval, or wishes to maximize its first mover advantage may decide repayments. There are some exceptions — Kiva, for example, is to keep its funding activity private. enabling some borrowers to raise money from the crowd at no interest, Companies that are too early on in their development may also be which can be a great option for small businesses; that program, better off waiting before launching their campaign. If potential backers, however, is currently limited to the US (see our feature above). As with donors, or investors think the idea is not yet fully baked, they will hold other crowdfunding models, lenders to a startup will have incentive to off from pledging money, bringing potentially negative attention promote the business to their own networks, building valuable word- that may damage future funding prospects. Alternatively, mature of-mouth marketing. companies also need to be careful about crowdfunding; instead, they While every startup will need to pick the appropriate model and can create their own platform to reap the benefits of market testing platform to raise money from the crowd, there is nothing preventing that crowdfunding provides. That’s the course of action taken by Sony, a startup from creating several campaigns. Indeed, it’s not difficult to which launched its First Flight crowdfunding and co-creation platform foresee startups in the near future building an early adopter base by earlier this year. pre-selling their products on a rewards-based platform, then going on Donations: Donations crowdfunding is best suited for charities to raise a funding round via an equity crowdfunding platform, and, once and personal campaigns. That doesn’t mean, however, that startups it is mature enough, borrowing money by listing on a P2P platform. are barred from using this model. It can be effective for social Some startups are already doing this. PonoMusic, for example, raised entrepreneurs who are running projects that may be attractive to $6.2 million on Kickstarter to raise awareness of its music player, and those who are passionate about that specific issue. used its success to raise a further $6 million from accredited investors Rewards: Reward-based crowdfunding campaigns are suitable on Crowdfunder. for many kinds of startups in various stages of development. The best fit is for startups that can promise the end product in return for the contribution — a copy of a video game, a tasty snack, or an innovative AlliedCrowds Crowdfunder Matrix hardware product — instead of just being able to offer perks like tee shirts in return for the pledge. Typically, entrepreneurs will need to have at least a working prototype to show the potential backers before they can turn to crowdfunding, using the money raised via pre-orders to fund the earliest production run. Unicorn Alpha But later-stage companies can also benefit from crowdfunding, as a Hunters Seekers marketing and market-testing tool. Indeed, some well-funded startups Financial have used crowdfunding campaigns as launch springboards, using early adopter feedback to either tweak their design, or to introduce new variants of a product (a new color or size, for instance). For later- stage companies, crowdfunding campaigns can also be used to enter new international markets.

Equity: Equity investment can often be a more desirable source of Backer Motivation funding than loans: early startups are often the most cash-strapped Dreamers Philanthropists

and monthly loan repayments can be a severe constraint on growth. Altruistic Equity-based crowdfunding campaigns are best-suited for firms that are able to show some degree of market buy-in. Investors on equity crowdfunding platforms tend to look for early stage startups that have the chance to grow rapidly, so they are willing to take on some risk if Earlier Later they believe in your company’s long-term vision. They will not invest, Stage of Development

10 Indiegogo Looks to the Future

s crowdfunding matured as an industry, new players have doing, they want to participate in your cause in some way, or they Ajumped in en masse — in 2013, even Donald Trump took part, desire the tangible perk. The first two are selfless, while the last two are pledging to partially or fully fund select campaigns on the platform more ‘selfish’ — if you offer perks that hit those motivations, you have FundAnything on a weekly basis. The vast majority of the platforms a wider audience.” have stumbled, failing to build the scale necessary to attract quality While much has been made of the potential of crowdfunding to projects and new backers. replace more traditional sources of SME funding, Cordesius believes As new entrants jumped in and flared out, Indiegogo focused on crowdfunding can work with angels and VCs, by helping them, for its core mission — allowing quality campaigns of various kinds to example, to see which products are resonating the most with the raise money from the crowd — slowly rising to become one of the crowd. most prominent platforms globally. Unlike its competitors, Indiegogo “At first, there was the idea that we’re going to repel each other, but has prioritized flexibility, allowing charities to raise money alongside we’ve found that it’s a yin-yang relationship,” she said. innovative hardware products, and giving campaigns various One of the company’s goals is to find the right institutional partners fundraising options. to work with, which can create an incentive for entrepreneurs to As it grew bigger, the company introduced new, innovative features, crowdfund their campaigns on Indiegogo, as well as generate positive publicity for the corporates and (in the right cases) enable them to find new and innovative products their customers may be interested in. “Crowdfunding is becoming Recently, for example, Indiegogo partnered with the brewery Shock Top to run the Shock the Drought campaign, which sought solutions a big part of starting and to alleviate the effects of the California drought. As crowdfunding continues to mature, Indiegogo has already financing your ventures.” positioned itself as one of the most important players in the space. If it elects to enter the equity crowdfunding domain, the company can - Alisa Cordesius, social innovation and become an almost one-stop-shop for startups and entrepreneurs to raise money from the crowd, further solidifying its place as a true design manager at Indiegogo crowdfunding leader. like its InDemand funding option, which allows campaigns to raise Indiegogo’s Top Ten Campaigns money following the campaign’s end. Indiegogo also made it easier for individuals and charities to raise money for their causes, dropping all Flow Hive platform fees on its donation-based platform Generosity (until recently Sondors Bike known as Indiegogo Life). Today, Indiegogo is a household name in the crowdfunding Restore King Chapel industry, and it has no plans of slowing down — indeed, CEO Slava Rubin has recently stated (as he has in the past) that the company Hour of Code is highly interested in equity crowdfunding, which was recently Super Troopers 2 approved by the SEC. As Indiegogo has matured, so has the entire industry, said Alisa Jibo Robot Cordesius, manager of social innovation and design at Indiegogo. Axent Headphones “Crowdfunding is becoming a big part of starting and financing your ventures,” she said. “It’s a great storytelling and marketing mechanism, Con Man in addition to raising money and market testing ideas.” Having seen thousands of campaigns go through the platform, Micro Drone Cordesius believes one of the key success factors is the perks that Opal Ice Maker campaigns offer to the potential backers. $3m $6m $9m $12m $15m “People generally want to contribute for one of four reasons,” she explained. “Either they know you, they passionate about what you’re Amount Raised

11 Crowdfunding Successfully

rowdfunding campaigns have steadily gotten sleeker and smarter, as entrepreneurs have learned from the Cfailures of predecessors. That’s a good thing from the perspective of potential backers, and it also means project creators need to ensure their campaign is as polished as possible from the moment it launches. We reached out to crowdfunding consultant Rose Spinelli of The CrowdFundamentals to better understand how to build a convincing campaign, and what mistakes to avoid.

ALLIEDCROWDS: What are some things and have them keep you updated regularly. AC: What are some tools you think are entrepreneurs may not know about but Don’t assume they’re the experts. Sure, they essential to running a campaign (backer- that are crucial to running a successful know crowdfunding, but they don’t know management software, for example), and crowdfunding campaign? your product or idea. So speak up. Good what tools do you think are missing? communication with your team will prevent ROSE SPINELLI: Finding relevant news media irreparable damage later. RS: Any tool that will help you find followers to write about you seems to be a huge and/or press coverage. I like Followerwonk, stumbling block. People don’t take the time AC: With so many campaigns now, how can Buzzsumo, ANewsTip, and Meltwater. What to do that, and if they do, they always start too entrepreneurs make their campaign stand out I think is woefully missing are platforms late. It’s a fatal blow to many campaigns. from the crowd? providing marketing, because that is by far the weakest link. If someone figures out how to Also, tying relevant current events to support RS: This relates to the last question, and it’s make that happen, everyone would flock to your campaign will always help. It can be about developing a public ‘voice’ that will give their site. in the form of newsjacking, which basically you authority and build the trust between entails using a topic that’s currently in the you and your crowd. So how to differentiate AC: Entrepreneurs are often excited about news and connecting the dots between it and yourself if your idea is not a never-been- their idea and that gets in the way of them your campaign or idea. But, it’s got to be a done-before campaign? (And, by the way, explaining well exactly what it is they’re natural fit. Say, for example, you’re developing most do fall into that category.) I think a lot looking to do — what are some ways for them a product that will add value, or otherwise of people fail to take true ownership of their to avoid making such mistakes? mitigate, a current vexing medical problem. campaign. I can’t blame them. We’re still very You might take advantage of a study that’s much straddling the old model, which puts RS: This should be a no-brainer but it seems to been released, and write an article about how an invisible wall up between you and your need to be said. The easiest way to avoid these your product will have a positive impact on consumers. mistakes is to focus on the user, and not on this medical problem. how great you are. I think there’s something AC: What are the biggest mistakes you see, inherent about social media that provokes AC: What are the biggest challenges to and how can entrepreneurs correct them? that type of hype in people, but it’s the wrong running a crowdfunding campaign? approach for crowdfunding. RS: They start too late and have virtually no RS: It’s a time suck, that’s for sure. If you know strategy when they launch. That’s a huge Lots of times, for example, campaigns describe going in you’re not going to be able to take one. It usually happens because they have their product or idea as the first ever, when the time, maybe crowdfunding isn’t right for conjured up some external deadline that they I know for a fact that’s not true. This creates you. If you have the luxury of working with an feel they must hit. I get calls and emails from unnecessary trust issues. Forget the hyperbole. in-house team, keep in constant contact with people insisting they will launch in two weeks Focus on what problems you’re solving for them to make sure they’re clear about your — and they think it’s okay to launch your your audience — and let them say how great broader vision and strategy, and that it’s being social sites at the same time! I’ve come close you are. Basic marketing, really. And now that implemented; no rogue voices. You can use to tears when I see really incredible ideas that equity crowdfunding is here, all the hype can Basecamp to avoid tedious meetings. just need some planning launch prematurely. work against your company in real ways. If I know they could have done really great if you’re an entrepreneur who wants to raise Also, if you’re outsourcing it completely to only they slowed down, took a breath, and capital in exchange for equity, make sure you a full-service crowdfunding company, be didn’t have that manic need to put it out there understand how general solicitation works hands on with them as much as possible before it’s ready. online. It’s best to consult an attorney.

12 Featured Campaign: Coolest Cooler

Image Source: Kickstarter

f there were a Mount Rushmore of crowdfunding campaigns, the of 2013. The campaign came close to its goal, raising $100,000 of its ICoolest Cooler would certainly make an appearance. The second- $125,000 goal. But, on Kickstarter, campaigns that don’t meet their most funded campaign ever on Kickstarter, the Coolest enjoyed target aren’t able to keep the money they’ve raised. incredible success, raising $13.2 million (a record at the time) from Instead of getting discouraged, Grepper went back to the drawing over 62,000 backers. board, made important tweaks, and came back with a much stronger The Coolest is a cooler on steroids. It comes with speakers, a blender, campaign the second time around. a cutlery set, and many more useful features. Its inventor, Ryan Grepper, “[The failed campaign] showed us mistakes to correct when we set out to energize the traditional cooler, making it a more prominent launched the second time, and this time, we were much more prepared feature of outdoor activities. Backers bought into his vision, making the with people to reach out to at the start of our campaign,” Grepper said. Coolest one of the most famous products to emerge via crowdfunding. “We also moved our design much farther along, and had much better The Coolest campaign underscores both the lucrative potential of luck launching our Coolest in the summer rather than mid-winter.” crowdfunding, as well as the difficulty of crowdfunding successfully. The second campaign attracted widespread media attention and Before Grepper’s wildly successful campaign in the summer of 2014, backer interest, which came as an initial surprise to Grepper and his he ran a campaign for an earlier prototype of the cooler in the winter team. “Coming in at 26,000 percent to goal is a challenge, but it’s a good Top Kickstarter Campaigns problem to have,” the inventor said. “We’ve had to quickly scale up and bring in outside experts to help us execute on every stage of this process, and it’s been a challenge moving at full speed while managing Pebble Time the process.” The great response allowed the Coolest team to upgrade certain components of the product, leading to a better product delivered to Coolest Cooler backers. Currently, the campaign is in the process of shipping out the coolers Pebble E-Paper Watch to the Kickstarter backers, some of whom have grown impatient with the wait. That’s a difficult problem to manage for those who crowdfund their products, as hype around a campaign brings with it Travel Jacket greater scrutiny. Still, Grepper thinks crowdfunding is a great way for entrepreneurs to build excitement and make their vision come to life. “We believe our Kickstarter backers will be some of our most Exploding Kittens enthusiastic supporters,” he said. “[Crowdfunding] allowed us build a base of support for a new business and make a dream a reality.” Grepper said the key to running a successful campaign is Ouya preparation, and ensuring the team gives itself enough time to be able to deliver on promises made: “As an entrepreneur you need to give $5m $10m $15m $20m $25m yourself enough runway.” Amount Raised

13 After the Campaign Ends

rowdfunding campaigns, almost by definition, are exciting. the right materials, and much more. CEnergetic entrepreneurs appear in sleek campaign videos to Dragon also provides free services for those who are thinking extol the virtues of their yet-to-be-created products, while backers about how to manufacture their product. The company has created a revel in the belief that their contributions are helping to create number of videos explaining the ins and outs of the manufacturing something that may never have existed otherwise as they track the process, from costing the parts to what waterproofing a product campaign’s progress toward its target. may entail. Recently, the company released a software solution When the campaign does reach its goal, the backers often perceive that allows entrepreneurs to come up with a Bill of Material (BOM) it to be the end point of the crowdfunding journey. For entrepreneurs, — a spreadsheet that allows factories to break down the costs, and however, the campaign’s end is just the beginning of a long process to entrepreneurs to better plan their manufacturing process. Tools like bring the product to market. the Dragon Standard BOM, Miller said, enable the entrepreneurs and A number of firms have sprung up to help entrepreneurs deliver factories to converse in the same language. products to backers. Arguably the most prominent is Dragon Promoting that sort of mutual understanding among the players Innovation, which, among other services, connects hardware startups involved in the manufacturing process is crucial for the industry’s with manufacturers in China. The company has employees on the maturity. Just a few years ago, early adopters did not have a clear ground, ensuring that the factories understand exactly what the understanding of how many units they needed to pre-sell in order for product is aiming to do, and that the molding, worker training, order factories to work with them, which helps to explain why many of the fulfillment, and shipping phases of product development are executed early rewards-based campaigns experienced delays. Several years on, as seamlessly as possible. Miller says the entrepreneurs are much better educated about what to Led by Scott Miller, who had previously worked at iRobot and expect post-campaign. That will keep more campaigns on schedule, Disney, the company has worked with some of the biggest hardware and lead to fewer disgruntled backers. products in crowdfunding, including the Pebble watch and the Coolest “I’m definitely excited for the industry,” Miller said. “There’s more Cooler. mainstream acceptance — it’s no longer on the fringes.” “Our vision has been to make consumer electronics feel easy,” said Miller, the CEO and founder. “We are providing the easiest and shortest path from prototyping to manufacture.” The company offers a number of services to help entrepreneurs in different stages of growth manufacture their products. The earliest stage at which Dragon gets involved is during the campaign planning phase. At that point, Dragon can provide guidance on the campaign goal, help entrepreneurs price the inputs they need to create their product, and ensure that the minimum number of units ordered during the campaign can be manufactured economically. “The decisions you make early on can cast a very long shadow,” Miller said. “We help entrepreneurs understand how much money they really need to deliver product. We explain how long it will take — manufacturing can involve up to 197 different steps, and we can help pick the appropriate ones depending on the product specifics. Finally, we go through a thorough design review to ensure the product is viable.” If the entrepreneurs make it through the process, they are awarded Dragon Certification, which can go a long way in reassuring potential backers that the product will not die out due to poor planning. Those campaign owners that raise the money from the crowd can continue their relationship with Dragon through the manufacturing process. The company helps entrepreneurs choose the best factory, “Factory - Robotic Arms” by Jason Armstrong negotiate the contract, review the designs, plan the schedule, source is licensed under CC BY NC ND 2.0

14 Crowdfunding, Entrepreneurship and Development

Image Source: Kiva

rowdfunding, because of its strong link to entrepreneurship, has That shouldn’t come as a surprise — developing nations have much Ctremendous potential to help both developed and developing lower rates of internet penetration and financial literacy and wealth. nations spur innovation, create jobs, and stimulate the economy. After Crowdfunding can help to promote the latter; until emerging markets all, it’s for a reason that the US legislation that legalized crowdfunding grow large enough to support robust crowdfunding ecosystems, came as part of the JOBS Act. however, we see the diaspora as a key driver of crowdfunded In many developing nations, entrepreneurship has moved to the capital. That’s because members of the diaspora community are well top of the agenda — and for good reason. Micro-, small-, and medium- connected to entrepreneurs in their home countries, and can better sized enterprises (MSMEs) are known for driving job growth in the understand the risks involved in supporting one business versus developed world, and while the picture is less clear in developing another. In addition to providing startup capital, diaspora communities nations, a widespread acceptance has been adopted for the importance can provide valuable mentoring and expertise, helping to reduce of these firms in creating jobs. A 2013 International Labor Organization the effects of brain drain that have plagued developing nations for report, for example, found the impact of startups and small businesses decades. to be positive on developing nations’ economies. Governments and multilateral aid agencies can also play a role “This is due to the positive effects of business dynamics (the here — just as many developing nations have been promoting processes of entry and exit): the entry of new firms may improve the entrepreneurship, many have also been looking to involve the diaspora overall competitiveness and innovativeness of the industry to which in their nations’ development. We believe crowdfunding presents a the start-ups belong,” the report noted. tremendous opportunity to combine the two trends. Likewise, a recent World Bank statement called for greater access Indeed, there is another powerful reason for governments to to finance for MSMEs in the developing world, pointing out that these support crowdfunding: one of the UN’s recently-published Sustainable firms are, “collectively, the largest employers in many low-income Development Goals calls for ‘Decent Work and Economic Growth.’ With countries.” an extra incentive to create more and better jobs, don’t be surprised Today, much of the funding that’s passed through crowdfunding to see more governments experimenting with crowdfunding as a platforms to developing nations comes from developed nations. method of promoting entrepreneurial activity and job creation.

15 Financing Entrepreneurs in the MENA Region

“Dubai, United Arab Emirates” by Paolo Margari is licensed under CC BY NC ND 2.0

ith a large population of well educated but underemployed Wyouth, the Middle East and North Africa (MENA) region is ripe for a startup explosion. The ecosystem continues to develop with incubator and accelerator programs supporting government initiatives across the region. Three limiting factors, however, persist: the lack of connectivity across the ecosystem; the limited access to early stage financing; and the lack of a “There is an appetite for crowdfunding, but the current lack of business-friendly regulatory framework to support entrepreneurs. regulation does not instill investors with confidence,” he said. Looking to solve the connectivity and funding issues, Philip Furthermore, “crowdfunding is perceived, wrongly, as funding of Bahoshy founded MAGNiTT. The online platform allows entrepreneurs last resort,” Bahoshy explained. “This points to the need for greater to list their startups, connect with investors, and interact with potential education around it, as well as angel investing more generally.” mentors to support them in their startup’s growth. Despite these challenges, crowdfunding platforms continue to “Our goal is to become the go-to platform for investors, mentors, gain traction in the region. Bahoshy pointed to the success of Eureeca, and potential co-founders to connect with MENA entrepreneurs,” an equity based crowdfunding platform, and Beehive, a P2P lender Bahoshy said. that he highlighted recently won the Gulf Capital Startup Business MAGNiTT does not aspire to be a crowdfunding platform. Instead, of the Year award. These two companies have taken off despite the it is looking “to create a network to connect entrepreneurs to the difficulties in the region. MAGNiTT is in early conversations with both, appropriate services and channels based on their specific needs and as well as others, to recommend their services to startups listed on requirements.” their platform, depending on their specific needs. Connecting startups to the right mentors, Bahoshy believes, “is the Furthermore, crowdfunding is emerging at the right time: there is best mechanism to support them in their business development and a push to spur entrepreneurship globally, and Bahoshy said he also eventual access to angel funding.” sees strong initiatives on the part of governments in the MENA region Bahoshy did say, however, that crowdfunding can play an important to push entrepreneurship as a means of diversifying their economies role in the region. away from their reliance on oil and as a source of job creation, training, “Our recent statistics highlighted that 37 percent of all startups and development. on MAGNiTT are looking to raise between $50,000 and $250,000,” he What’s helping the effort is the success of a number of startups that noted. “Access to early stage capital to kick start growth is challenging have begun to pave the way for others: Souq.com, Talabat, Souqalmal, to source, and crowdfunding can potentially fill that gap.” and Careem are just four household name examples, with Careem To be successful, however, Bahoshy thinks two things need to having just raised $60 million in Series C funding. be addressed: the development of a regulatory environment that With entrepreneurship continuing to take off in the region and supports equity- and lending-based crowdfunding, as well as greater strong demand for early stage financing, expect financial regulators to education of founders and investors on the mechanisms and benefits look more seriously at creating the appropriate regulatory framework of the different types of crowdfunding. for crowdfunding.

CONTACT US: @AlliedCrowds

[email protected] /AlliedCrowds business.alliedcrowds.com www.alliedcrowds.com /AlliedCrowds

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